To buy or rent in Hong Kong? Tipping point guide to 93 neighbourhoods shows the way

The exorbitant cost of property in Hong Kong leaves potential first-time buyers with a question: at what point does buying a flat become cheaper than renting it? A new guide to the tipping point between the two may help

A common quandary for residents in Hong Kong is whether it makes more sense to buy or rent a flat. On one hand, there’s the perception that paying rent is like throwing money down the drain. On the other hand, the cost of entering the market and decades tied up in mortgage repayment can be a huge financial burden.

New data from online property listings website Spacious tries to settle the question. The start-up analysed trends in 93 neighbourhoods and calculated the “tipping point” – the point at which renting an apartment starts to exceed the cost of buying one.

It found 44 areas of Hong Kong that have a tipping point of just two to four years for Hong Kong permanent residents. Among these neighbourhoods are far-flung Tuen Mun and Tung Chung. There are parts of Hong Kong Island, including Chai Wan and Aberdeen, but also areas that have became popular with expats, such as Kennedy Town and Sai Ying Pun. The upscale residential enclaves of Hong Kong Gold Coast and Discovery Bay also fall into this category.

Meanwhile, places such as nightspot SoHo and prime shopping area Causeway Bay have a tipping point of five to eight years, according to the data. In North Point and Tsim Sha Tsui, it is nine to 13 years.

Asif Ghafoor, CEO of Spacious, says the data should be of particular interest to first-time homebuyers, who often struggle to decide whether to buy or rent when planning to move out of their parents’ homes.

“In the very long term, it is almost always cheaper to buy than rent, but if you plan to live in a place for less than two years, it typically makes more sense to rent,” says Asif Ghafoor, CEO of Spacious.

“So if I’m moving house to Mid-Levels west, for example [tipping point nine years], if I only plan to stay for three to four years then it makes more sense to rent. If I want to move to Sheung Wan and plan to stay for three to four years [tipping point two to four years], then it probably makes more sense to buy.”

In calculating the tipping point, the company assumed a 30 per cent down payment, a 30-year mortgage tenor, an interest rate of 3 per cent, brokerage fee equivalent to 1 per cent of the home’s value, and stamp duty rates payable by first-time buyers, Ghafoor says. “We calculated the median average sales price per square foot and the median average rental price per square foot using transaction data and our own listings data, close to 500,000 data points.”

If I want to move to Sheung Wan and plan to stay for three to four years, then it probably makes more sense to buy

Asif Ghafoor

He adds: “The upfront costs of buying are always higher than the upfront costs of renting, and it takes time to recoup those upfront costs in terms of lower monthly mortgage payments as a buyer versus higher monthly rental payments, which also include a return to the landlord.”

The data shows sharp contrasts between neighbourhoods that, despite being near one another, are worlds apart in terms of the tipping point. Examples are Wong Chuk Hang (seven years) and Deep Water Bay (25 years). Another case is Kowloon in Kowloon Tong (20 years) and Sham Shui Po (three years).

Permanent residents pay stamp duty of up to 4.5 per cent of the price of the first flat they buy. Buying a home in the city is a much tougher proposition for non-permanent residents, the data shows. The average tipping point for the whole of Hong Kong is five years for permanent residents, but 15 years for non-permanent residents.

Expats and buyers from China who do not have permanent residency must pay stamp duty of 30 per cent when purchasing homes in Hong Kong, a measure the government rolled out in a bid to cool down the property sector, compared with stamp duty of 15 per cent for permanent residents buying their second property or multiple properties.

“One thing that becomes very clear very quickly is whether you are a Hong Kong permanent resident or not has a large bearing on the data. Being a non-resident in Hong Kong typically adds 10 years to the tipping point.” Ghafoor says.

Hong Kong maintained its position as the world’s priciest home market for the seventh year in a row in 2016, according to the Demographia International Housing Affordability Survey.

Apartments in the city cost 18.1 times gross annual median income in the third quarter of 2016, slightly lower than in 2015, when the cost was a record 19 times income, the survey found.

A buying frenzy, especially among people from China, relatively low interest rates and the Chinese belief that property ownership is a sign a person is established, have all contributed to the city’s home price surge in recent years. Just under half of Hong Kong’s more than two million households lived in self-owned properties in 2016, government figures show.

Rents on high-end properties in the city’s traditional expat strongholds have fallen in the past few years as international banks and financial firms have shed staff and reduced expat housing allowances.

If you are a first-time buyer, you can profit from both upward and downward trends in the market. It is always recommended to buy a flat once you qualify

David Hong

“These reductions might partly explain the higher tipping point in some luxury neighbourhoods, as the sale price and rental price relationship is undergoing a dislocation that will take some time to process,” Ghafoor says. “Landlords who own luxury apartments worth more than HK$20 million are not going to be pressured to sell below their asking price and are being forced to take lower rental prices in the meantime.”

For instance, in areas where the flats are expensive, such as The Peak and Shouson Hill, the tipping point between renting and buying a flat is in excess of 25 years for permanent residents, while the cost of renting never surpasses that of buying for non-permanent residents, the data shows.

In these circumstances, mainland Chinese and expat buyers would be expecting significant appreciation in the value of the properties they buy, or be making their investment decision based on other assumptions, such as an expected decline in the value of the yuan – China’s currency – or the improvement in their social status that comes owning a luxury Hong Kong property, Ghafoor says.

Others in the local property industry agree that buying a property is always a better option as long as the buyer can afford the monthly mortgage repayments and other related expenses.

“Buying a flat is still the most effective way for an individual to increase his or her leverage,” says David Hong, head of research at consultancy China Real Estate Information. “If you are a first-time buyer, you can profit from both upward and downward trends in the market. It is always recommended to buy a flat once you qualify.”

Hong adds that, in his experience, most qualified buyers don’t hesitate to buy because the benefits of buying outweigh those of renting, such as the flexibility to change the home decor.

As for non-permanent residents, Hong says buyers from China tend not to be put off by higher stamp duties because the added cost is not usually much of a concern. Such buyers were looking for asset allocation options that could be profitable in the long term.

Denis Ma, Hong Kong head of research at property services firm JLL, says there’s no definitive answer as to whether it’s better to buy or rent. It depends on a family’s needs.

“For buyers who need to purchase a home because they are getting married or have a newborn baby, current market conditions are probably still acceptable. As long as buyers have a job and are able to service their mortgages, I think they’ll accept that their property may dip into negative equity if the market turns,” Ma says.

On the other hand, for non-local investors, the downside risks, cooling measures such as reductions in the maximum permitted loan-to-value ratio, and the imposition of additional stamp duty make it less attractive to buy, he says.

“But still, we do see long-term investors piling into the market,” he adds.